Directors duties

Directors of an organization are in a fiduciary relationship with that organization and should therefore always act in good faith towards that organization, and in the best interests of the organization. This fiduciary relationship forms the basis and the foundation from which all director duties emanate.

Below is a summary of Common law duties and Companies Act duties (reference to the Act in brackets after each duty):

Common law duties

Fiduciary duties

A director should act in the best interests of the company (Section 76(3)(b))

A director should not act beyond or exceed the limitations of powers or capacity which means a director should always act within the ambit of their authority. (interpreting Section 20(5) and (6))

A director should act within their powers and for a proper purpose. This means that they should act in the best interests of the company and in a manner that benefits the company as a whole and bona fides towards the company interests. (interpreting Section 76(3)(a))

Should exercise unfettered and independent discretion and judgement. This requires that a director should exercise independent and unbiased judgement when reaching and making decisions for the company (interpreting Section 76(4)(a))

Should not be in a position or should avoid a position of conflicts of interests. Their personal interests should not conflict with those of the company and this also includes the duty to disclose any potential conflicts of interests (Section 76(2))

Should not make any secret profits or possible incidental profits at the expense of the company (interpreting Section 76(2))

Should disclose any personal interests in any contracts with the company (Section 75)

Should not misappropriate corporate opportunities due to the company as well as improperly competing with the company (interpreting Section 76(2) read together with Section76(3)))

Duty of Skill, Care and Diligence

This duty requires a director to display and demonstrate the same care as a reasonable person in their personal affairs as well as degree of skill which one would reasonably expect from a reasonable person with his/her knowledge and experience. (Section 76(3)(c)(i) and (ii))

Companies Act

One or more shareholders, directors or prescribed officers of a company may apply to the High Court for an appropriate order to restrain the company or the directors from doing anything inconsistent with any limitation, restriction or qualification contemplated in subsection (2), but any such proceedings are without prejudice to any rights to damages of a third party who:

a) obtained those rights in good faith; and

b) did not have actual knowledge of the limit, restriction or qualification. (section 20(5))

Each shareholder of a company has a claim for damages against any person who intentionally, fraudulently or due to gross negligence causes the company to do anything inconsistent with:

a) this Act; or

b) a limitation, restriction or qualification contemplated in this section, unless that action has been ratified by the shareholders in terms of subsection (2). (Section 20(6))

At any time, a director may disclose any personal financial interest in advance, by delivering to the board, or shareholders in the case of a company contemplated in subsection (3), a notice in writing setting out the nature and extent of that interest, to be used generally for the purposes of this section until changed or withdrawn by further written notice from that director. (Section 75(4))

If a director of a company, other than a company contemplated in subsection (2)(b) or (3), has a personal financial interest in respect of a matter to be considered at a meeting of the board, or knows that a related person has a personal financial interest in the matter, the director

a) Must disclose the interest and its general nature before the matter is considered at the meeting;

b) must disclose to the meeting any material information relating to the matter, and known to the director;

c) may disclose any observations or pertinent insights relating to the matter if requested to do so by the other directors;

d) if present at the meeting, must leave the meeting immediately after making any disclosure contemplated in paragraph (b) or (c);

e) must not take part in the consideration of the matter, except to the extent contemplated in paragraphs (b) and (c);

f) while absent from the meeting in terms of this subsection (i) is to be regarded as being present at the meeting for the purpose of determining whether sufficient directors are present to constitute the meeting; and (ii) is not to be regarded as being present at the meeting for the purpose of determining whether a resolution has sufficient support to be adopted; and

g) must not execute any document on behalf of the company in relation to the matter unless specifically requested or directed to do so by the board. (Section 75(5))

If a director of a company acquires a personal financial interest in an agreement or other matter in which the company has a material interest, or knows that a related person has acquired a personal financial interest in the matter, after the agreement or other matter has been approved by the company, the director must promptly disclose to the board, or to the shareholders in the case of a company contemplated in subsection (3), the nature and extent of that interest, and the material circumstances relating to the director or related person’s acquisition of that interest. (Section 75(6))

A director of a company must

a) not use the position of director, or any information obtained while acting in the capacity of a director

to gain an advantage for the director, or for another person other than the company or a wholly-owned subsidiary of the company; or

to knowingly cause harm to the company or a subsidiary of the company; and

b) communicate to the board at the earliest practicable opportunity any information that comes to the director’s attention, unless the director

reasonably believes that the information is either immaterial to the company; or generally available to the public, or known to the other directors; or

is bound not to disclose that information by a legal or ethical obligation of confidentiality.

(Section 76(2))

Subject to subsections (4) and (5), a director of a company, when acting in that capacity, must exercise the powers and perform the functions of director:

a) in good faith and for a proper purpose

b) in the best interests of the company … (Section 76(3)(a) and (b))

Subject to subsections (4) and (5), a director of a company, when acting in that capacity, must exercise the powers and perform the functions of director with the degree of care, skill and diligence that may reasonably be expected of a person:

(i) carrying out the same functions in relation to the company as those carried out by that director; and

(ii) having the general knowledge, skill and experience of that director (Section 76 (3)(c)(i) and (ii))

In respect of any particular matter arising in the exercise of the powers or the performance of the functions of director, a particular director of a company —

a) will have satisfied the obligations of subsection (3)(b) and (c) if:

(i) the director has taken reasonably diligent steps to become informed about the matter;

(ii) either:

(aa) the director had no material personal financial interest in the subject matter of the decision, and had no reasonable basis to know that any related person had a personal financial interest in the matter; or

(bb) the director complied with the requirements of section 75 with respect to any interest contemplated in (aa) above; and

(iii) the director made a decision, or supported the decision of a committee or the board, with regard to that matter, and the director had a rational basis for believing, and did believe, that the decision was in the best interests of the company; and … (Section 76(4))(a)

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)